How Does 401k Matching Work?

401k plans are one of the most common investment vehicles that Americans use to save for retirement.

Employer matching of your 401k contributions means that your employer contributes a certain amount to your retirement savings plan based on the amount of your annual contribution.

Whether you’re on your first job or are thinking about retirement, there are a few things you need to know about employers matching your 401k contributions. For most employees, a defined contribution plan is one of the primary benefits offered by their employer, with a 401k being the standard employer-sponsored retirement plan used by for-profit businesses. Similarly, some employers use 403b or 457b plans. The type of plan is based on the type of entity; 403b plans are used by tax-exempt groups, such as schools or hospitals; and 457b plans are for government workers, although there are some non-governmental organizations that also qualify to use these plans.

While there are some minor differences between these plans, they are generally treated in a similar manner, and they usually have the same maximum contribution limits.

How Much Can You Contribute to Your 401k?

For 2020, you can contribute up to $19,500, and an additional $6,500 if you are age 50 or older.

When it comes to matching, specific terms of a 401k plan can vary widely. Your employer may use a very generous matching formula, or choose not to match employee contributions at all. Additionally, not all employer contributions to an employee’s 401k plan are the result of matching. Employers may make regular deferrals to employee plans regardless of employee contributions, though this is not particularly common.

Make sure you check your employer’s plan documents for the details on exactly how your 401k works.

But here are two common types of matches that companies usually match on:

Partial Match

A partial match means that your employer will match part of the money you put into your 401k, up to a certain amount. A common partial match provided by employers is 50% of what you contribute, up to 6% of your salary. So what this means in practical terms is that if you earn $80,000 per year, your contributions that will be eligible for matching are 6% of your salary, or $4,800 in this case. But since your company only offers a 50% partial match, they will match half of the $4,800, or $2,400. So to get the maximum amount of 401k match, you have to put in 6%. If you put in more, say 8%, your employer will still only match half of 6% of your salary, because that’s their max. The employer has the ability to determine the matching parameters.

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